The British stock market has been falling for a while, resulting in a plethora of cheap shares up for grabs. While I believe a mild recovery is on the horizon, interest rates are still some way off of regaining normal levels.
Nevertheless, sentiment for UK shares is becoming more positive both domestically and internationally. As we head into the holiday season, I think we will begin to see many businesses post more promising results.
I believe dips like this one provide a great opportunity for me to snap up cheap shares before the market recovers. In the words of Warren Buffett, “Buy when there’s blood in the streets.”
Naturally, a recovery can’t be guaranteed, but I think it’s a small risk that could offer great rewards. From my perspective, we might already be in the recovery phase as many UK shares are seeing price rises.
Hence, I’m considering two high-quality, affordable stocks that could deliver exceptional profits in the coming years.
British American Tobacco
British American Tobacco (LSE: BATS) has not had a stellar year, down 23% since last holiday season and underperforming the overall UK market by 3.9%. However, with a market cap of £56.98bn and £8.72bn in earnings, it has an impressive price-to-earnings (P/E) ratio of 6.5%. Furthermore, it has a consistent track record of increasing its return on capital employed (ROCE), a good metric to gauge how well the company is spending its money.
Using a discounted cash flow model, analysts estimate a fair price for British American Tobacco at £74.56, making it undervalued by almost 66%. This offers a lot of room for growth.
But it’s not all roses on the tobacco farm, as smoking is losing favour in many parts of the world. British American Tobacco has a lot of debt and only a 58% dividend payout ratio, leaving some investors wary.
Despite a positive outlook in the coming years, the company may have to come up with some fresh ideas if it hopes to remain relevant in the long term.
JD Sports Fashion
The UK-based athletic equipment retailer JD Sports Fashion (LSE:JD.) is the polar opposite of a massive tobacco giant, promoting health and wellness to the British public. This makes it a good option to add some more diversity to my portfolio. Since its inception in 1981, the company has rapidly grown to become one of the most recognised sports fashion brands in the UK, with over 75,000 employees nationwide.
While not as undervalued as British American Tobacco, JD Sports still has lots of growth potential. Analysts are estimating a fair value price of £2.41 for JD Sports, 30.7% higher than its current price of £1.48.
Admittedly, JD Sport’s current net profit margins of 1.9% are lower than the 3.6% seen last year. But with earnings forecast to grow by 25% per year, it still looks like a great earning opportunity to me — unless sport suddenly falls out of fashion.
